Skip to comments.Congress and Clinton Turbocharged Mortgage Meltdown
Posted on 10/31/2011 8:34:37 AM PDT by SmileRight
What youre about to read is a real blood-boiler. Mortgage meltdowns and housing bubbles dont cause themselves, they are caused. The root cause of our current housing mess was massive government intervention that went horribly wrong. In previous columns, we covered the early precipitating causes.
Now, lets stroll back to the latter half of the 1990s decade. The Clinton Administration had already hot-wired CRA and HUD to extend home ownership to all citizens, regardless of their creditworthiness. Congress and the Federal Reserve then jumped on the bandwagon. This activism caused mortgage standards to be relaxed across the industry.
Clinton juiced-up the CRA again in 1995, to promote securitization of sub-prime mortgage loans. The idea of securitization was...
(Excerpt) Read more at bizpacreview.com ...
While that is true, this article paints the relaxing of mortgage standards as the culprit. It was not. If people had continued to have jobs, they would have been able to pay the mortgages. The REAL CULPRIT was the oil price shock.
We've done precious little in 40 years since the last oil price shock to avoid the devastating effects on our economy from oil prices. Mortgage failures are the symptom, not the cause. And Mortgage failures occur in almost every economic downturn, frequently causing the economic downturn to be termed a "real estate bubble" when it's not really.
“If people had continued to have jobs, they would have been able to pay the mortgages.”
The point is many people didn’t have jobs that would have allowed them to buy a house or even if they did they didn’t pay their mortgage (& never planned on paying it). That is why they weren’t credit worthy to begin with!
Show me the big increase in foreclosures and delinquent rates between 1995 and 2005. Then get back to me.
“Mortgage meltdowns and housing bubbles dont cause themselves, they are caused.”
He also caused that big hole at the end of Manhattan
While I think derivatives were a joke and legalized gambling for the banking industry and the main cause of the problem, I have wondered where all that excess cash from the run up in oil prices went, not only from the U.S, but from around the world. It had to have a major effect on all economies.
Banks were forced to lend to people who had almost zero ability to pay back their loans. It drove the prices - and RISK of owning a home - up... waaaay up. Free money caused other mini-bubbles... and now - years later - here we are with the mess caused by idiot democrats...
No they weren't forced. A few banks like Bank of America capitulated to ACORN, when ACORN threatened to use the Community Reinvestment Act to sue if they didn't make more minority loans. They were never forced to make loans to people who didn't have the means to pay them back.
Banks were forced to lend a portion of the money back to the same community they had raised the deposits from. And I don't have a problem with that at all.
The companies which benefitted most had already spent hundreds of millions drilling and completing wells when there was relatively little market for the product ($20/bbl), and when the price went up had the oil to sell.
And don't forget the billions the Federal Government collected in taxes, on the order of two dollars for every dollar in profit for the oil companies--not to mention the billions in idle offshore lease block leases and 'fines' and cleanup costs (a cleanup the government hindered from day one) for BP.
In the meantime, the banks were forced to make loans in declining neighborhoods they would not have made loans in before to people with no income, no job, and no assets (NINJA loans). That createed a bubble, home equity loans gave people the ability to mine the bubble for cash as the 'value' of their property went up, and the derrivatives insured the lenders against loss. We picked up some of the tab, but it isn't all over yet--and all we have to show for that is a bill.
At least I can drive somewhere on $4 gas.
While sounding correct, there may be no data to support that contention.
The government does not keep an official statistic on the number of homes in foreclosure or repossessed by banks and lenders. Instead, the generally accepted numbers on foreclosures are kept by the Mortgage Bankers Association. That is the national association that represents the mortgage banking industry, and most importantly has only tracked foreclosures since 1990. Therefore causal factors originating before that date, and in reference to your contention regarding "oil crisis", are not proved.
A more likely causal relationship exists between relaxiation of bankruptcy regulations and foreclosures.
The article even goes so far as to say banks were making No Income and No asset loans with no or little truthful documentation.
If that's so, then where are the prosecutions for documentation fraud?
The fact remains that mortgages take it on the chin in every economic downturn, and this is the worst downturn since the great depression. It wasn't caused by mortgages. It was caused by the oil price shocks.
And if that's so, then which is it. The banks were forced to make these loans. Or the banks committed documentation fraud so that they could make these loans? I'm not buying that the banks were forced to commit fraud. If the really couldn't find worthy buyers in a community, the worst case is that they were forced to stop taking that community's deposits.
“While that is true, this article paints the relaxing of mortgage standards as the culprit. It was not. If people had continued to have jobs, they would have been able to pay the mortgages. The REAL CULPRIT was the oil price shock. . . . Mortgage failures are the symptom, not the cause. And Mortgage failures occur in almost every economic downturn, frequently causing the economic downturn to be termed a “real estate bubble” when it’s not really.”
I don’t think this is correct. Economies will always have “shocks.” Oil prices, Katrina, 9/11, inventories too high . . . etc. Badly overleveraged economies respond badly to shocks because the shock starts a process of deleveraging. Deleveraging begets more deleveraging. But a non-bubbly economy takes a little hit and starts growing again.
So the “cause” may be the “shock.” But the difference between a quick recession and a depression is the amount of leverage. By that measure, relaxing mortgage standards was a very big deal and a major contributor to the mess we have today.
I’m not talking about the oil companies, they don’t own much oil, I’m thinking more of opec.
I would like to do a “man on the street” (literally) interview to see if the Occupy people even know what damage government intervention has caused in our housing market. Unfortunately history gets rewritten by the time it gets to the next generation.
“The root cause of our current housing mess was massive government intervention that went horribly wrong.”
In other words, big government as usual.
Let’s not forget that this all began as a solution for the problems of public housing, and the belief that pride of ownership was the magic needed to solve poverty. That created plans for easy money, a relaxing of standards and regulations, and once there is easy money to be had, money people are going to figure out how to take advantage of it. It’s off to the races, and everyone is betting big.
I have been in the mortgage business for 16 years....we in the industry know the real causes and effects...
People also forget that the “tech bubble” brought many investors into the real estate market for speculation in an effort to continue reaping windfall returns...
You might also note the amount of homes that were being sold to “illegal immigrants” that never seems to be talked about through the use of TIN numbers instead of SS numbers.
I can go on and on...
If anything, they are losing clout with the drilling going on elsewhere, especially plays like the Bakken and Eagle Ford, and the Canadian Tar Sands.
The oil companies (well larger international ones) are the ones who drilled those wells, too, for the most part, at least where the oil industry was not "nationalized" and the terms of the lease agreements were adhered to.
Overseas, there is a geopolitical risk as well as the geological and engineering risks involved in drilling exploration and development wells. (With the EPA and other agencies trying to find a way to impede drilling here, it is nearly as bad in some places).
Look at what happened when Hugo took over in Venezuela, for instance. He declared changes in production agreements, and siezed equipment as well when the oil companies started pulling out.
Fannie Mae has an electronic approval system we used called FANNIE MAE DU (desktop underwriting)
You would not believe the type of loans this system was approving electronically, where previously we had to review every loan details manually....
The Community Reinvestment Act (CRA), passed in 1977, holds banks and savings institutions accountable for meeting the credit needs of all communities they are chartered to serve, including low- and moderate-income communities. Under the legislation, federal banking agencies periodically evaluate banks to ensure that they are attentive to community needs.
To ensure a positive CRA evaluation, banks actively cultivate links to the community, especially through providing funds and services to a community-based program like Neighborhood Networks. Contact the CRA officer at your local bank. The bank may be willing to sponsor an innovative new welfare-to-work program or bank employees may be willing to teach a course on financial literacy for residents.
Neighborhood Networks centers can benefit from the CRA by working with their local banks and financial institutions to promote increased community-lender partnerships. These partnerships can lead to greater resources available in the community to promote sustainability and development.
The links below and to the right provide more information on CRA and the opportunities it presents to Neighborhood Networks centers.
The Village Voice wrote comprehensively here describing the Clinton-era dealings.
I agree that is largely the root cause. But I think DannyTN is on to something too. There were many people on the bubble in terms of their ability to repay a mortgage. They took the usual solution by moving WAY out of town.
In our area it was surprising to hear about the boom towns so far our - 40 or 50 mile commutes.
Then, when oil prices spiked and the Demos would not allow President Bush to allow more drilling it became a choice of paying the mortgage or buying gas to get to work.
As I recall, that is what pushed the housing bubble over the edge and started the collapse.
For some reason there is a blind spot on the Free Republic about the true reason for the 2008 economic melt-down. It was The Commodity Futures Modernization Act of 2000 (CFMA) signed into law on December 21, 2000 by President Bill Clinton. This combined with the Gramm-Leach-Bliley Act, recinded the Glass-Steagall Act of 1932. It was this United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. President Clinton left office with legislation that virtually left Wall Street investors with a free license to run the derivatives market any way they wanted. It was like opening a five lane freeway with no speed limits. It was these derivatives, especially the credit default swap, which were at the heart of the financial crisis of 2008. The effects of the collapse of the housing market was amplified by the credit default swap market. It is time we put a blue flashing light on Bill Clinton—and Republican Senator Phil Gramm.
Oil Prices have not been a "little hit" it's been a major hit. It's a much worse scenario than in the early 70's when we also took a major hit from oil prices. This would have been a major economic hit even without leverage. Energy prices are one of the 4 or 5 key inputs to the economy.
To suggest that oil price increases would have been an economic cake walk if not for mortgage leverage is not in my opinion credible.
I agree that leverage magnifies the intensity of a recession. But mortgage debt is less of a magnifier than other forms of debt. People have to live somewhere. They are paying rent or they are paying a mortgage. They may be doubling up with multiple families occupying a residence. But they can do that whether they are renting or paying mortgages. So mortgage leverage is not that great of a magnifier.
In the absence of the mortgage leverage, you'd have seen a commercial real estate crisis first with rental units going bust. Granted that commercial real estate may have more equity backing. The problem would show up in Insurance company stability, REITs going bust, etc.. and wouldn't have hit the banks quite as hard, but the net impact to the economy would probably have been pretty much the same.
Next, President Clinton appointed Andrew Cuomo to head up Housing and Urban Development (HUD) and urged his imposition of regulations requiring lending institutions to substantially increase sub-prime lending.
Cuomo created regulations which forced the government sponsored mortgage entities, Fannie Mae and Freddie Mac, to step up loans to minorities under the logic of the affordable housing movement-every American should be a homeowner. It turns out affordable housing did not mean inexpensive homes poor people could afford, but instead, easy credit to buy homes they could not afford.
Clinton's Treasury Secretary, Democrat Robert Rubin, aided by Democrat Lawrence Summers, organized and led the effort to repeal the Depression era Glass Steagall Act, allowing investment banks to use federally insured depositor cash to back millions of mortgages, while easing underwriting standards at the same time. No money down? No problem.
In addition Rubin pushed through the Commodity Futures Modernization Act, which allowed the creation of mortgage back securities, fictitious loans packaged as investments, and sold to pension funds. Democrats in the New York State Insurance Regulatory commission allowed AIG to insure mortgage backed securities with an invention known as the Credit Default Swap.
The Justice Department allowed the laws of the government to be used by the combined legal efforts of both themselves under Reno and Gorelick, and community activist organizations like ACORN to sue lenders for not making sufficient numbers of (risky) loans to the groups that the government defined as needing home ownership.
There was widespread misuse of government funding and corruption of Fannie Mae and Freddie Mac by top Clinton Cronies, Raines, Johnson, Gorelick, and Rubin that essentially enabled government backed organizations to enter the private mortgage market with federal money to compete with and coerce private banking into practices heretofore considered unethical.
Regulatory oversight had changed dramatically to accommodate the Federal home loan mortgage activity designed to enable sub par loans to be made.
In an effort to reverse the activist activities of government backed entities and its own regulatory people, The New York Times reported in September of 2003:
"The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry".
But Democrats defeated this legislation. Rep. Barney Frank and his supporters said this (that is found in the Congressional Record): " 'These two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis,' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee."
The first incentive I remember was if you bought a house - and lived in it for 2 years - you didn't have to pay capital gains on the profit.
Each year it seemed there were more incentives - for banks, lenders, citizens etc. People were using their homes like ATM machines. Who could blame them - a house bought for $80,000 in some neighborhoods were selling for $400,000 a few years later.
Of course there wasn't really money in the house - that was an illusion until the house was sold. But people bought the idea - banks agreed and the housing market kept heating up on endless good news.
The problem: the system worked like a ponzi scheme. The first people in got out with money - lots of it. The last people lost everything. Most of us in Florida could see what was happening - anything could have caused it to burst - the situation was that unstable. So no, it wasn't oil prices .. it was government incentives that caused the mess... oil prices might have helped bring it down - but at the level it was operating, higher coffee prices could have brought it down too.
Parts of Florida and parts of California really did have a speculative real estate bubble that was very much like a ponzi scheme. But the vast majority of the country did not.
The mess in Florida and California was caused by speculation. No different than the great Tulip bubble. They weren't buying to take advantage of the incentives. They were buying because they were betting that the trend in valuations would keep going up and they'd be able to flip the houses in short order and make a mint. In a lot of cases, they weren't even living in the homes.
The great Tulip bubble stated rationally too - then price increases started feeding on each other without regard to actual value. The same happened in Florida.